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Challenger share price falls following coronavirus update

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The Challenger Ltd (ASX: CGF) share price is down by 9.3% so far today, following an update on the company’s current capital position and FY 2020 guidance.

This comes on a day that has seen the S&P/ASX 200 Index (ASX: XJO) trading sharply lower by 6.1% at the time of writing, while the US Federal Reserve cut interest rates to zero this morning.

What did Challenger announce today?

This morning, Challenger announced that despite the recent market volatility from the coronavirus pandemic, it remains well capitalised and is currently on track to achieve normalised net profit before tax within its previously given guidance range for FY 2020.

Challenger added that the capital position of its Challenger Life division remains solid. The division is continuing to actively manage its investment portfolio to remain within its target range of 1.3 times to 1.6 times its Prescribed Capital Amount (PCA). The strategy in hand to achieve this goal includes the reduction of the capital intensity of its investment portfolio.

Challenger also pointed out that it has additional finance flexibility, including access to a $400 million group banking facility if required, with $250 million drawn and held in cash.

Impact of recent volatility on fixed income investments

Due to recent market volatility in the investment market, Challenger noted that investment grade fixed income spreads have more than tripled to above 140 basis points. Challenger also pointed out the sharp falls in global equity markets.

The financial services company noted that the current market volatility has not had a significant impact on Life’s normalised earnings, although volatility has impacted the fair value of the division’s assets and statutory earnings.

Additionally, the earnings for Challenger’s funds management division has been impacted due to the amount of funds under management and the associated performance fees.

FY20 earnings guidance update

Last month, along with the release of its H1 FY20 financial results, Challenger reported that it was expecting its FY20 normalised net profit before tax to be around the top end of its guidance range of $500 million to $550 million.

Challenger now has returned to its original guidance in the middle of that range, in light of recent market developments, adding that the recent events with regards to the coronavirus haven’t significantly changed the company’s profit outlook.

Challenger reported last month that normalised net profit before tax was up 3% to $279 million for the half-year compared to the prior corresponding period, while normalised net profit after tax (NPAT) had fallen by 4% to $191 million. Total revenue in its Life sales division had increased by 15% to $3.1 billion.

Challenger also previously announced that its full-year dividend was expected to remain unchanged from FY19 with a full-year payment of 35.5 cents per share. The company did not provide any further update with regards to this in today’s announcement.

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Motley Fool contributor Phil Harpur has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Challenger Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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